The New Estate Tax

As of 2010, the estate tax will be repealed. At first blush this sounds like a real windfall to the American public, but because of the way Congress and its laws are structured, the estate tax comes right back into existence in the year 2011, unless the Congress at that time agrees to vote it back out of existence. Who knows which factions will be in power at that time and what will happen.

 

The top tax rate of 55% will immediately drop to 50% in 2002, and by 2009 it will eventually be 45%. The $675,000.00 individual exemption as it exists this year will be raised to $1,000,000.00 in 2002, $1,500,000.00 in 2004, $2,000,000.00 in 2006, and $3,500,000.00 in 2009.

 

The real pitfall is not the elimination of the estate tax, but rather the Carry Over Basis Rule that we will have to deal with. In reality, in many cases, we will be replacing the estate tax with a capital gain/income tax issue. The old step up in Basis Rule goes out the window. The old way, was that upon the death of a person, the assets in their name, got a stepped up in basis to the date of death value, rather than the acquired value. For example, if the decedent had acquired property for $100,000.00 and at his/her death the property was worth $250,000.00, those inheriting that property would get a basis stepped up to $250,000.00. If they immediately sold that asset, there would be no capital gains tax to be paid. That is not the way it is under the new Act. There is a possibility of a step up in basis for non-spouses of $1.3 million and $3 million for spouses, if appropriately planned for. Some assets will not be available for this step up. The record keeping that will be necessary, will be horrendous. Furthermore, the record keeping goes on from generation to generation if the property is not sold, but rather passed on through the family.

 

The gift tax has not been repealed but some new rules have gone into place. The intent of the rules are to prevent higher tax bracket owners from transferring to lower tax bracket owners. A $1 million lifetime gift exclusion goes into effect beginning 2002. The gift tax rate will decline through 2010, at which time gifts in excess of $1 million will be taxed at a rate equal to the top income tax rate at that time.

 

Having practiced in this area for almost 30 years, we have seen various changes to the law. At the beginning of the Ford administration, the tax law was radically changed. The problem back then was that it was so complex that even the most astute estate planners could not determine how to handle the new law. Within a short period of time, it was repealed and the law which we are familiar with and has been in place for approximately the last 20 years was implemented. Hopefully, when Congress realizes the nightmare they have created, there will be some serious revisions to the Carry Over Basis Rule. This does not mean that we can simply sit back and do nothing. We must keep working on our estates with what is available to us at the current time. Even if the higher exemption limits avoids federal estate tax for some individuals, there is still the ramifications of Probate Court, Incompetency and the possibility of a State inheritance tax which need to be dealt with. The Living Trust can go a long way to handling these issues.

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